Question
XYZ Gold Ltd. is a small gold company. After purchasing a tract of land for $500,000 and incurring exploration costs of $80,000, the company has
XYZ Gold Ltd. is a small gold company. After purchasing a tract of land for $500,000 and incurring exploration costs of $80,000, the company has found gold deposits (ore) estimated at 100,000 tonnes. It is further estimated that 5,000 tonnes of ore will be mined in the first and last (11th) years and 10,000 tonnes every year in between. The land is expected to have a residual value of $25,000.
Structures and storing facilities have been build on site at a cost of $40,000. These structures are expected to have a useful 18 years with no residual value. The company does not intend to use the buildings elsewhere. Mining machinery installed at the mine was purchased second-hand at a cost of $80,000. Half of this machinery would last 15 years with no residual value. The company does not intend to use the machinery elsewhere. The other half of the machinery has a use life of 20 years with no residual value, but can be used at XYZ's operations elsewhere. Cost is to be allocated equally between these two groups of machinery.
XYZ also spent another $150,000 to build a shaft into the mine so that ore could be extracted. The company estimates that the site reclamation and restoration costs that it is responsible for under the prevailing laws when the mine is depleted have a present value of $50,000. XYZ follows the policy of expensing exploration costs and capitalizing development costs.
A-Calculate the fair value of the gold property, excluding the structures and machinery.
B-Prepare journal entries to record the fair values of the gold property, and the related expenses and assets.
C-XYZ extracts and removes 6,000 tonnes of gold in the first year of operations. Prepare journal entries for depreciation and depletion for that year.
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